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Spitzer Turns Some Settlement Funds Into Gifts

By ANN DAVIS
The Associated Press
12/24/03

The Wall Street Journal

NEW YORK -- To Wall Street firms and mutual funds battered by scandal this year, Eliot Spitzer seems like the Grinch That Stole Christmas.

But to a host of Empire State charities and well-connected law-school deans, the crusading New York attorney general is acting a lot more like Santa Claus.

Three civil settlements he struck in an unusual case against wealthy telecom executives and IPOs have allowed him to bestow more than $5 million in largess over the past several months to dozens of community groups across New York state. The recipients are intended as a sort of proxy for individual investors who allegedly suffered from the actions of the defendants, who were accused of profiting from undisclosed awards of sought-after initial public offerings from investment bankers seeking their business. The executives also were accused of profiting from the sale of their companies' stock after it had been promoted by artificially optimistic Wall Street research.

But the groups receiving the windfall also represent voter constituencies that could be key to Mr. Spitzer's widely expected Democratic run for governor in 2006.

"Sometimes we don't feel that we get the attention that we deserve, so this is a very nice gesture to show that our state officials are really concerned about everyone in the whole state," says Peggy Ogden, president and chief executive of the Central New York Community Foundation in Syracuse. Her foundation, along with three others in Albany, Buffalo and Rochester, each got $100,000 courtesy of Colorado billionaire and Qwest Communications International Inc. founder Philip Anschutz. Mr. Spitzer had sought from Mr. Anschutz $4.8 million in IPO profits and $1.45 billion in Qwest stock sales. Mr. Anschutz, who has maintained his innocence, settled both allegations with donations of $4.4 million.

Ms. Ogden's group is pooling money to coach high-school students in financial-life skills, like balancing a checkbook. She began using proceeds this month to train teachers.

Other checks are rolling in just in time for the holidays. And while Spitzer staffers have made it clear whose money is being donated, it is Mr. Spitzer who is getting credit for the windfall.

"It was a very good Christmas present," says Richard Matasar, dean of New York Law School. He says that when he learned in May that Mr. Spitzer's office was doling out grants to six law schools of $200,000 each, his staff let the attorney general's office know they'd like to be next in line.

In October, Mr. Spitzer, who attended Harvard Law School, called him personally to say more money had come in, and his school would get $200,000 from former Qwest Chief Executive Joseph Nacchio.

Mr. Matasar calls the clinics, which are being established to represent small investors in securities arbitration claims, "politically astute," adding: "What you've done is spawned the next generation of lawsuits by a group of people who are committed to the goals you have. ... It's the gift that keeps on giving."

Since taking office in 1999, Mr. Spitzer not only has shaken up Wall Street with novel legal cases, he also has forged creative models for settlements. He did so last week with Alliance Capital Management Holding LP, securing a 20 percent reduction in the mutual-fund company's fees, on top of a fine, even though his investigation centered not on fees but on improper trading.

In the telecom executives' settlement, he is following a legal doctrine he has used mainly to settle price-fixing cases with makers of such products as vitamins, women's shoes and toys: compensating charities with ties to victims when it is difficult or impossible to identify those actually harmed. In last year's vitamin settlement, for example, his office steered $19 million to health and nutrition programs. While such settlements aren't uncommon, they are less typical in securities cases. For example, the $75 million in fines and penalties that the state of New York received as part of settlements with big Wall Street firms over conflicted stock research went back into general state coffers. Other times, restitution funds are created where investors can seek recompense.

Mr. Spitzer says he isn't doing so for political gain and that part of his job as attorney general is to compensate consumer groups wronged by businesses. He said it was impossible to quantify alleged harm to individual telecom investors in the case.

"What we're doing is in my view the right thing to do, and we're going to keep doing it," he said. "Are there going to be some people who embue everything we do with bias or political prejudice? That's for them to do and me to ignore."

He adds that it was Mr. Anschutz who initially came up with the idea of giving to New York charities, though his office insisted on broadening his suggested recipient list beyond New York City to include upstate charities and more ethnically diverse entities such as the Institute for Puerto Rican and Hispanic Elderly. (A spokesman for Mr. Anschutz says while suggestions were made, his boss had approval power over the final list.) It was also the attorney general's office that suggested the law-school clinics.

Some of the recipients of the grants say Mr. Spitzer isn't even considered a political ally. Danny Greenberg, president and attorney in chief of the Legal Aid Society, which got $100,000 from the Anschutz settlement, points out that his organization often helps the poor sue New York state housing and benefits agencies and actually causes headaches for Mr. Spitzer, whose job is also to defend the state in those suits. He has long known the attorney general, however, and learned of the grant from him personally.

Other recipients professed to know little about the IPO allocation practices, known as "spinning," central to the case. Lorraine Cortes-Vasquez, president of the Hispanic Federation in New York, says, "I wish I would be more informed about what this was about," but adds that her group did the homework to make sure the money was coming from legitimate sources. She says the Hispanic Federation is dividing $100,000 among Latino member organizations to fund such activities as arts education. The Police Athletic League is using $100,000 in settlement money to beef up after-school soccer, basketball and chess programs, it said.

The defendants themselves aren't natural Spitzer allies, either. Mr. Anschutz, who struck the first of the three settlements in May by agreeing to pay $3.2 million to charities and $1.2 million for the law-school clinics, is a well-known donor to the Republican Party. His nonprofit Anschutz Foundation has previously given to free-enterprise groups such as the Heritage Foundation and Defenders of Property Rights, according to the group's federal tax forms.

In addition to seeking the return of $28 million in profits made from selling shares in IPOs, Mr. Spitzer's initial complaint sought the return of more than $1.5 billion that he alleged the executives obtained from the sale of stock in their own companies, including the exercise of options.

Mr. Anschutz's spokesman says Mr. Anschutz wasn't an executive of the company when it was public, so wasn't in a position to influence investment-banking business. (Mr. Anschutz was, however, nonexecutive chairman of Qwest's board until last year, and is still a director of Qwest.)

Scott M. Himes, a lawyer for Mr. Nacchio, who settled for $400,000 to two law schools, says his client "felt that a charitable contribution was an appropriate way to resolve this. ... It helped these institutions. So we believed it was a sensible way" to settle the case.

Barry Bohrer, an attorney for Stephen Garofalo, former chief executive of Metromedia Fiber Network, who also paid $400,000 to two law schools, wouldn't comment on the settlement negotiations, but said his client denies wrongdoing. He said in a statement that a decline in stocks in the telecom sector "created an atmosphere of suspicion and doubt in which anyone associated with these companies is improperly assumed to have had some part in wrongdoing."

Two other telecom executives, former WorldCom Chief Executive Bernard Ebbers and McLeodUSA founder Clark McLeod are still disputing the charges.